The sky is falling! Now what? - Posted by TDBuyer

Posted by Gary O on July 11, 2002 at 10:11:36:

Exactly! Buy, hold and rent. Some leverage is OK, but don’t leverage completely. This is what I think. I just wish some of the big dogs that post to this site regularly would give their opinion (I’m still a newbie). Maybe you could start a new post to catch their attention and we’ll give the same response.

The sky is falling! Now what? - Posted by TDBuyer

Posted by TDBuyer on July 10, 2002 at 23:14:17:

A local Los Angeles radio talk show just had on author Bob Prechter. Mr. Prechter spoke at length about the current economy and his projections for the next few years. In a nutshell he thinks the bear market is just starting and that we are going to see some serious deflation, one he likened to the depression of the 30?s. He singled out real estate as a market that will be hit?hard.

This was in part due to the fact that because the RE market is way over-inflated thanks to low interest rates.

Now we can debate whether or not his projections are valid, but for the sake of argument let?s assume his vision is valid.

How should us sharp CRE investors get positioned to survive, and profit, from the possible upcoming sh**storm?

(BTW ?Buy & Hold? author David Schumacher last night projected an additional 50 ? 60% appreciation in RE prices in the next few years.)

Re: The sky is falling! Now what? - Posted by Mark (SDCA)

Posted by Mark (SDCA) on July 11, 2002 at 17:11:30:

Lee in Tx is right on the money. The best single piece of advice I ever got was as follows:
"When the blood is running in the streets, buy the most expensive home you can afford."
It worked like a charm 7 years ago. And if the RE market should crash it will work like a charm again.
I am actively buying in the stock market. That is one massive over-reaction. If the real estate market crashes, it will be the same and I will look to buy there as well.
The people who make money in the markets like this are the ones who can contain their fear. The time to buy is when everyone else is selling. The stock market WILL come back, just like the RE market did (and will again if it should crash).
As a final note, I would be VERY surprised if there is widespread commodity deflation. (Or inflation for that matter.) Prices seem quite stable right now. In fact, the economy in general is not that bad. The point abou the Fed is well made. Interest rates wont (cant) go much lower. Consumers, businesses and the government are going to have to pick up the spending slack.

Mark

J.P. Morgan said… - Posted by eric-fl

Posted by eric-fl on July 11, 2002 at 14:49:12:

“The man who is a bear on the future of the United states will always go broke.”

There will always be opportunities - Posted by Lee in TX

Posted by Lee in TX on July 11, 2002 at 12:15:14:

No matter what the economic environment, there will always be opportunities to make a profit if you are agile enough, and if you adjust your game-plan to the current conditions. Don’t let fear stop you from making deals. Just be aware of the market conditions and factor them into your offers.

I was investing in Texas through the eighties when we were hit with the Tax Act of 1986 which took away many of the tax benefits of real estate investing, the oil bust and massive loss of jobs in the oil patch, and the fiasco called the Savings and Loan Crisis.

Many investors who were dependent upon the tax benefits from their real estate investments were wiped out, if their deals did not make economic sense without the tax benefits. Some communities which were based on the oil economy suffered losses in value of the houses because no one was able to buy them and people were out of work. And, lest you forget the RTC and all that, the S&L losses make Enron and Worldcom look like a picnic by comparison.

Yet, there were investors who made money during this entire time! Some made bloody fortunes! I was buying houses like crazy because I could get such tremendous discounts in both price and terms, and a positive cash flow from the rents. I knew people would always need a place to live…housing is a basic human need. And I knew the crisis would not last forever. Houston was on its knees maybe, but it was not going to dry up and blow away. I felt like some over-sexed guy in a harem! I would love for things to get like that again, from a property buying perspective, because I know how to take advantage of those conditions and make a profit. You can too!

When the wind changes, you just adjust your sails to catch it and stay your course. Don’t be dependent on appreciation to make your profit. The same is true for depreciation, which is minor now anyway. Learn to buy right, and structure financing with terms you can live with.

The market value of the properties you hold really only matters if you are planning on selling soon. Be sure you control the timing on this event.

And if you are a buy and sell guy, understand that prices of real estate don’t usually move as rapidly as a stock price. It is not likely that a house will loose 20 percent or more in a single day like some NASDAQ issue hit with bad news. If you buy low enough, you can still sell at a profit, even in a declining market.

Be adaptable, but don’t loose your focus.

Lee in TX

Re: The sky is falling! Now what? - Posted by michael

Posted by michael on July 11, 2002 at 10:01:37:

Before posting ridiculous subject lines, it would be wise to do some research on to whom you apparently let sway you. Prector is a practitioner of Elliot Wave theory. He made his name in the equity and commodity markets and like many others by got famous by seemingly making a few accurate predictions. And like all the others (Granville, Ruff et all) he was soon shown to have practically worthless advice.

Re: The sky is falling! Now what? - Posted by michaela

Posted by michaela on July 11, 2002 at 07:21:05:

the way i see it: people still have to live somewhere. so, maybe instead of buying/selling properties, this would be the time for buying/holding and renting out.
there are always opportunities

Re: The sky is falling! Now what? - Posted by JT-IN

Posted by JT-IN on July 11, 2002 at 02:08:27:

TD:

I agree with Jim L; don’t get caught in the headlights worrying about it.

But to answer your “hypothetical question”; the best place to be positioned in a deflationary period is in cash, very liquid, initially… then move to capitalize on the undervalued (hard) assets, as they sink like a rock. Hopefully getting involved in buying after the “over-reaction” and “frenzy” that would inevitably occur, which would cause prices to fall below values that make any sense.

However, considering the discourse that would go along with such happenings, we may need the institution of things such as marshal law, etc., if things got that bad. So maybe buying some shares in some Handgun manufacturers may pay off too. As Jim said, best not to worry about it too much.

As stated, there are predictions on both sides, and someone will be right. We need to be in a spot to capitalize on the upside, either way it goes.

As a caution to reacting to the doom and gloom… I remember 20+ years ago, when Howard Ruff was preaching gloom and doom, of financial calamity, and commodity shortages in a huge way; (“Ruff Times”) After reading some of his writings, and being intrigued by his predictions, I DID NOT make a few investments that I otherwise would have, had I not read his works and ideas… Guess what, I allowed good ole Howard cost me some great opportunities, by allowing him to influence my intuition. So, don’t get caught up in this in a big way, speaking from experience.

Just the way that I view things…

JT-IN

Re: The sky is falling! Now what? - Posted by Jim Locker

Posted by Jim Locker on July 11, 2002 at 01:08:24:

I also am afraid of deflation. But I am not worrying about it.

Why? Because if it happens to any significant degree (not local deflation as a housing bubble hisses, but broadly based and involving industry), it’ll bankrupt the entire country. It would be a positive feedback mechanism that would carry on until very little value was left anywhere.

Might as well worry about a dinosaur killer hitting us.

As it happens, I think that the current budget deficits that W is starting to run might be just what we need - although I don’t think W can get any credit for planning this. Deficits are inflationary, and the way to stop a deflationary cycle is by promoting inflation before the deflation gets started.

If it does get going, buy tangibles such as gold and silver. Forget just about everything else.

Re: There will always be opportunities - Posted by Jim Locker

Posted by Jim Locker on July 11, 2002 at 14:06:27:

Yes. I made millions during that period of time. I waited till the RE market bottomed after that mess with the S&Ls, then purchased everything in sight.

Keep in mind though that the S&L crisis hit one sector of the economy and only one. It also occurred during what was otherwise a steadily strengthening environment, when interest rates were high but dropping.

Things are different now. I don’t wish to sound like Cassandra, because I do believe the potential crisis is manageable and will most likely be managed adequately. Nonetheless, the possibility of widespread deflation seems far greater now than at any other point of my life.

I also don’t agree that the S&L crisis dwarfs the current accounting scandals. First, the S&L crisis, large as it was, covered only one sector of the economy. Second, it covered a sector that was immediately amenable to Federal intervention and stabilization.

So far, We have seen Enron (Oil sector) implode due to fraud. Now WorldCom (Telecommunications) is about to implode. Merck (drugs) is now in the hot seat. How many others? Which Fortune 500 company will be the next to be revealed as a hollow shell? How could the Fed possibly stabilize this kind of thing? This is very serious.

Re: The sky is falling! Now what? - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on July 11, 2002 at 20:50:04:

Michael---------------

Thanks for the breath of fresh air.

Maybe we need a website titled something like “wierd predictions for our economy and those who make them.” Then information such as you supplied could be easily referenced to check the source of predictions.

Didn’t the Elliott Wave theory prove that the United States of America economy–the gross national product–shrank to about $44.00 in 1999?

Good InvestingRon Starr*****

Re: The sky is falling! Now what? - Posted by Jim Locker

Posted by Jim Locker on July 11, 2002 at 08:30:17:

Should deflation genuinely and generally occur, property values will drop steadily. So will rents.

But mortgages payments won’t. Any property investor renting properties will be bankrupted if he has a mortgage to pay.

Should it become widespread through the economy, industry after industry will collapse; why buy today when prices are declining - wait till next month or next yeat. So sales of everything but unavoidable necessities will drop way off. Industries will then lay off, triggering a deep recession/depression as money stops circulating.

People won’t put money in banks; no interest and, in a declining price environment, the bank will have to provide a negative interest (probably in the form of fees) to continue operating. So the best performing money will be the money under the mattress.

At this time, it seems to me that generalized deflation is a definite risk - which is not to say it will happen. If it does, we are all totally screwed.

To this point, the central banks have managed the stock market meltdown adequately and we have to presume they will continue to do so - the economy is still ticking along. But these accounting frauds that are popping up everywhere are doing enormous damage, and I fear that we have just seen the tip of the iceberg. It is possible that the central banks will lose control. If they do, we’ll have a severe depression.

Might as well plan on the dinosaur killer. Surviving the kind of downturn that will happen - if it happens - will be more luck than planning.

Re: The sky is falling! Now what? - Posted by CurtNY

Posted by CurtNY on July 11, 2002 at 08:20:33:

I agree to an extent, but you must have a STRONG equity position or very good cash flow, so if/when the bubble bursts, you can ride it out. But I definately suggest going to a buy/hold strategy. Trying to flip properties if/when values are decreasing is not a good place to be.

CurtNY

Re: The sky is falling! Now what? - Posted by Jim Locker

Posted by Jim Locker on July 11, 2002 at 06:57:04:

:But to answer your “hypothetical question”; the best place to be positioned in a deflationary period is in cash, very liquid, initially

D’OH! Yes, of course. What was I thinking. Cash is king of course in a deflationary environment.

This does not mean CDs. It does not mean a passbook account, or a brokerage account, or anything else. It means CASH - in hand, and stuffed under the mattress.

In an environment where prices are falling quickly and steadily, you may figure that the banks will find ways to charge you negative interest (AKA fees). So you would stay away from banks.

Re: The sky is falling! Now what? - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on July 11, 2002 at 18:42:31:

Jim Lockyer--------------

Besides gold and silver, don’t you think we should buy real estate, since it tends to go up in inflationary times?

Good InvestingRon Starr***

Re: Things are different now - Posted by Lee in TX

Posted by Lee in TX on July 11, 2002 at 16:44:25:

Yes, Jim, the current environment is serious. But we will get through it. My main point was only that Crisis always creates opportunities for those who recognize them and take action.

I did not mean to imply that the situation today is just like the 1980?s in Texas. I only recited a few of the conditions that existed then as an example of what was perceived as a bad investing environment where, nonetheless, some people made good money by seizing opportunities. The conventional wisdom that existed then was real estate was dead as a wealth creation vehicle. Fear was rampant. Unless you were in Texas, which suffered far worse than the rest of the nation at that time, you have no idea of the magnitude of the suffering and the losses. To some, it seemed like the end of the world.

But conventional wisdom is almost always wrong. It was not the end of the world. Nothing lasts forever, including down markets. Economies normally move in cycles from boom to bust, and back again, despite Alan Greenspan and the Fed. I only meant to point this out because it is a natural human trait to think that whatever direction the economy is moving will continue forever. Three years ago, everyone thought that the stock markets would compound their equities at 20 percent or greater every year in perpetuity, despite only single digit growth rates in the underlying economy. That kind of growth in the financial assets was unsustainable, and stocks are now returning to their historic averages. We may now be facing several years of under performance by the stock market as the excesses are worked out of the system.

My statement as to the size of the S&L Crisis compared to the recent accounting scandals at Enron and Worldcom was based on the total dollar amounts announced for the losses. The RTC and testimony before Congress claimed that the total costs to clean up the failed savings and loans and other commercial banks cost upwards of $500 billion. Some argued that the true cost to the taxpayers was twice that amount. By comparison, The financial misbehavior at Worldcom was about $4 billion, and Enron inflated its earnings less than that. The same is true for Merck

It is true that investor confidence has been shaken by the accounting scandals and outright fraud committed by some of the largest publicly traded companies. Will anyone ever look at a company?s annual report again and see the auditor?s signature and opinion and trust that the numbers accurately reflect the true state of a company?s financial condition? Already foreign capital is leaving the United States markets as evidenced by the Dollar?s slide against the Euro and gold. The U.S. capital markets were once thought to be the safest place to invest in the world, but that perception is changing. And the printing presses are rolling 24/7 at the Fed to try to stimulate the domestic economy. The fact that the money supply is growing so rapidly further exacerbates the Dollar?s decline because it is perceived as inflationary. We are debasing our currency, and foreign investors are awakening to this fact and dumping their Dollar holdings.

You are right in your assessment that widespread deflation is a distinct possibility under the current conditions. We have already experienced two painful years of deflation in the value of financial assets in the stock markets. Several TRILLION dollars in market capital has evaporated without a trace. Companies and consumers are laboring under terrible debt burdens. Very few have any spending capacity left. Housing has held up despite all this until recently, and even this sector is showing signs of weakness in some areas now. I would expect valuations to falter under these conditions if nothing else changes. It just remains to be seen how far things will go, and how fast.

Perhaps you will once again make enormous profits in the current cycle as you did in the last meltdown. I hope to join you in that pursuit!

Lee

Re: The sky is falling! Now what? - Posted by michael

Posted by michael on July 11, 2002 at 22:00:37:

I don’t know about 99, but 87 is what caused his downfall. He had a huge advisory business in the eighties, and was telling all to buy before the market tanked. He was soon largely out of the guru business.

Re: The sky is falling! Now what? - Posted by Gary O

Posted by Gary O on July 11, 2002 at 09:19:50:

“Should deflation genuinely and generally occur, property values will drop steadily. So will rents”.

“But mortgages payments won’t. Any property investor renting properties will be bankrupted if he has a mortgage to pay.”

I’m not sure if this is totally true or not (the part about the rents falling and the rental owners going bankrupt). Wouldn’t it be that if deflation occured, the interest rates will rise and therefore you’ll have less people purchasing homes and renting instead? This would make for very low vacancy rates. I can see rents falling in areas where they are currently extremely high, probably beach front condos, ect. However, in medium to smaller towns where rents are already FAR LOWER than at the beach, or in the big city, I just don’t see it happening. If a severe depression occured I can see my rents on my 2 bed 1 bath apartments maybe drop, at the most, $50 a month, but my vacancies should drop considerably. I don’t think this would bankrupt me. What are your, or anybody elses thoughts on this approach. For the record I believe you can be leveraged to a degree and not get burned, but if your properties are entirely leveraged you CAN and probably will get burned, if a severe depretion like were talking about were to occur.

Re: The sky is falling! Now what? - Posted by Winston, CT

Posted by Winston, CT on July 11, 2002 at 20:32:39:

The only safe strategy would be low income housing, section 8 properties. The government will keep paying if we do get to this meltdown. Also, now more than ever we have to be more selective with the deals we do. Buying at 100% FMV should be ruled out for all of us, even if it is a no money down deal. In the meantime, make hay while the sun shines!
Yes, all the responsible criminals under the guise of “CEO” etc, should be sent to jail with no probation, stripped of their ill-gained wealth.

Re: The sky is falling! Now what? - Posted by JohnBoy

Posted by JohnBoy on July 11, 2002 at 17:07:14:

Who is going to pay your rents when everyone is being laid off or having to take drastic pay cuts just to keep a job???

All those losing their homes will be losing them because they lost their incomes. If they lost their incomes then how will they pay your rents?

Even if their was a higher demand for rentals that alone won’t mean you can get top dollar for rents. The demand will be for LOW rents that people can afford after losing good paying jobs by having to take low paying anything jobs they can get just to survive!

If you have no mortgage to pay then obviously you can get something for rent that won’t affect you as much since you don’t have to cover a mortgage payment! But those over leveraged can get wiped out big time if rents drop below what the mortgage payments are, which wouldn’t take much on properties being purchased creatively for close to current market values.

Also, I think you will see a drastic rise in evictions as people renting lose jobs. They aren’t going to just move out peacefully with nowhere to go! And if things are that bad you could have a harder time getting people out of your property where Judges may be a lot more lenient on throwing people out into the streets. Your costs to get people out can drastically increase by eating up all your profits just from all the people that stop paying rent while you are stuck going through a long process to get them out!

There are a number of variables that can have a major negative affect on everyone depending on how bad things were to get. Until it happens there is no way of knowing for sure. But those that are liquid will make out like bandits once things recover again.